Quote from: hazek on May 29, 2011, 09:33:42 PM

Quote from: billyjoeallen on May 29, 2011, 09:29:54 PM

2. Bitcoin fractional reserve lending

obviously FR banking risks a run on the bank, but conservative banking practices and a high reserve ratio with full disclosure should minimize the risk.

I would quit using Bitcoin the second that or some form of monetary inflation is implemented.

I agree with the inflation part, but fractional reserve banking shouldn't be something that you have to worry about. And I'm sure it will happen eventually.

A bank can practice fractional reserve banking with Bitcoins easily. But it will either have to use actual Bitcoins (if the people taking the loan wanted to interact with the block chain) or use tokens that are only accepted at that bank and it's partners (which will have nothing to do with the block chain). If they give out actual Bitcoins, they will do so either fraudulently (not informing those who deposit Bitcoins there) or legitimately (in which case I would imagine they would have to pay interest to the depositors). If they do it fraudulently, I doubt that would last long once people caught on and they will go out of business. If the do it legitimately, there is really no concern, depositors will not be able to withdraw their full amount, and this would be part of the contract for initial deposit. Bitcoins can't be created by fractional reserve lending the way the current system allows dollars to be created (the bank can't report loans and reserves as assets that are considered money exchangeable at a central bank because Bitcoins can't be created this way, only Bitcoins are exchangeable in the block chain, pretend Bitcoins aren't). Bitcoins can only change hands, so there is no concern of inflation. If the bank wants to use tokens, this isn't a concern either, because again it doesn't lead to Bitcoin creation. Interest will have to be paid with actual Bitcoins as well, meaning the loans had better be worth it. And there will not be a lender of last resort to back them up on a bank run, so they have to be open about their policies or risk going out of business.

Basically they way fractional reserve banking "creates" money is through bookkeeping and the existence of a central bank. This is impossible with Bitcoins. You can try to pretend you have more Bitcoins than you do, but the block chain knows better.